trusts

Question 1

does a trust ever fail for a lack of trustee? When can a trustee resign and what procedure follows?

Answer 1

No.

1) court approval upon showing can no longer serve as trustee.
2) accounting: property initially received, receipts/disbursements, property at hand and liabilities

Question 2

when is there a trust?

Answer 2

settlor delivers trust property to trustee for beneficiaries with intent to create a trust. Trustee must have powers or active duties.

Question 3

when can trustee be removed?

Answer 3

Material violation of trust’s terms. File a petition for removal.

Question 4

resulting trust

Answer 4

term courts use when a trust fails. Distribute directly to beneficiaries.

Question 5

precatory language

Answer 5

not binding

Question 6

must trust be in writing?

Answer 6

Yes, except personal property (i.e. stocks and bonds) to a trustee other than settlor/beneficiary w/ intent to create simultaneously with or prior to the transfer [but trust of land always in writing]

Question 7

are trusts default revocable or irrevocable?

Answer 7

Revocable and amenable.

If written trust, revocation/amendment must be written.

Question 8

can settlor be trustee?

Answer 8

yes.

Question 9

does naming a person as “joint tenant” on a bank account create a right of survivorship?

Answer 9

No. Must expressly say with right of survivorship.

Question 10

who has to sign the signature care of a joint bank account for there to be a valid right of survivorship?

Answer 10

the decedent, not the survivor. But if b/w husband and wife and funded by CP, then both.

Question 11

cy pres

Answer 11

judicial proceeding diverting funds to another charitable activity.

Question 12

RAP

Answer 12

No interest is good unless it must vest, if at all, not later than 21 years after some life in being .

Question 13

standing to bring action concerning charitable trust

Answer 13

attorney general and settlor. AG must be given certified copy of petition, or judgment voidable by AG.

Question 14

what if non-charitable trust violates RAP?

Answer 14

apply “cy pres type” perpetuities reform statute to carry out settlor’s intent as FAR as possible within period of the Rule.

Question 15

what can trustee do if name charitable beneficiary ceases to exist or qualify as charity for FIT purposes?

Answer 15

Name new charity with same or similar charitable purpose without court approval. Send notice to AG.
Judicial proceeding only necessary where trust purpose changes.

Question 16

honorary trust gift

Answer 16

trustee on her honor, but if she doesn’t perform the trust, the gift fails and there is a resulting trust. And RAP probably limits to 21 yrs. anyway

Question 17

can there be a trust for or bequest to an animal?

Answer 17

Trust- yes
Bequest- no
Court can reduce to reasonable amount if excessive

Question 18

constructive trust elements

Answer 18

wrongful conduct and unjust enrichment

Question 19

Purchase money resulting trust

Answer 19

A pays purchase price for land, causing title to be in B’s name. Presumption: PMRT. If related, presumption: gift.

Question 20

if life insurance beneficiary kills insured, is there a constructive trust?

Answer 20

No, bc statute applies so that beneficiary doesn’t take.

Question 21

effect of spendthrift clause

Answer 21

judgment creditor cannot reach beneficiary’s interest in spendthrift trust by garnishment or attachment.

Question 22

5 exceptions to spendthrift clause

Answer 22

1) contracts for necessities (medical, food, rent)
2) child support obligations
3) any interest retained by the settlor (income, but not principal, from irrevocable trust) (all of revocable trust)
4) federal tax liens
5) fraudulent transfer

Question 23

can settlor compel distribution from a discretionary trust? Does a discretionary trust stop a settlor’s creditor from reaching the trust principal or income?

Answer 23

No. Creditor reaches to max extent trustee could distribute to settlor.

Question 24

Can a beneficiary compel distribution for needed support from a support trust?
Can beneficiary’s creditors who furnish necessaries compel distribution?

Answer 24

Yes.

Question 25

Where is jrd and in what counties is venue proper?

Answer 25

District courts and statutory probate courts have concurrent jrd

individual trustee: trustee’s residence or where situs of trust is maintained
multiple: situs
corporate: situs
Also where estate administration pending

Question 26

when can beneficiaries get accounting? Can that right be limited?

Answer 26

On demand after 12 months and 12 month intervals (cannot limit demand right of primary beneficiaries)

Question 27

what is decanting power? is court approval needed?

Answer 27

power to transfer trust assets to new trust with different provisions. Court approval not required as long as notice given to beneficiaries/remaindermen.

Question 28

Does trustee have power to ____?

Answer 28

Yes. The Texas Trust Code, which applies to all trusts in Texas except to the extent the trustee’s powers are expanded or limited by the settlor, gives broad fiduciary powers to trustee. Specifically, the Trust Code expressly authorizes a trustee to [do whatever question asks, except self dealing and imprudent investment]

Question 29

Name 5 examples of self dealing ( violates duty of loyalty). Trustee cannot:

Answer 29

1) borrow trust funds
2) buy or sell trust assets to itself (corp can get court permission)
3) loan funds to trust
4) profit from serving as trustee except for compensation (ex: confidential info or commission)
5) corporate trustee cannot buy its own stock as trust asset (but can retain)

Question 30

Can settlor waive the self-dealing rules?

Answer 30

Yes. But exculpatory clause, by itself, does not authorize self dealing (and its strictly construed)

Question 31

If trustee breaches fiduciary duty (self-dealing, imprudent investment), what are beneficiary’s options?

Answer 31

1) deny compensation and remove trustee
2) ratify and waive
2) surcharge for loss. If self dealing, then under no further inquiry rule, the only issue is damages.
3) constructive trust

Question 32

When does the 4 year statute of limitations for a fiduciary (trustee, executor, guardian) begin to run for a trustee?

Answer 32

when repudiates the trust, dies or resigns, or gives accounting

Question 33

Can trustee loan to beneficiary?

Answer 33

Yes, if prudent (fair interest, secured loan, reasonable repayment schedule).

Question 34

can beneficiary recover from a sale by the trustee to the trustee’s relative?

Answer 34

Yes. Loans or sales to relative or business entity of which trustee is an officer, director, partner, employee, or principal shareholder

Question 35

How do we know if the trustee made an imprudent investment?

Answer 35

Under the Uniform Prudent Investor Act, invest for TOTAL RETURN, taking into account potential appreciation and capital gain as well as ordinary income. Prudence is measured by conduct at the time the investment decision is made, NOT BY HINDSIGHT based on outcome or performance. Under the Uniform Principal And Income Act, trustee can exercise ADJUSTMENT POWER in favor of income beneficiary where appropriate, and CAN ALLOCATE CAPITAL GAIN AND PRINCIPAL TO INCOME.

Question 36

When is a trustee’s allocation of receipts between principal and income presumed equitable?

Answer 36

If it follows the FIT depletion allowance rules

Question 37

How are these allocated under the Uniform Principal and Income Act between principal and income?: interest, rental income, cash dividends on stock, eminent domain condemnation award, insurance proceeds for trust property destroyed by fire, delay rental, royalty, bonus.

Answer 37

Income: interest, rental income, cash dividends on stock, ALL delay rental

Principal: eminent domain condemnation award, insurance proceeds for trust property destroyed by fire

Allocate receipts from royalty and bonus equitably.

Question 38

How are distributions allocated from
a) pension plans, annuities and IRAs?

b) liquidating assets (patents, copyrights, book royalties)
c) money from an entity (corp., part., etc.)
d) stock dividends from an entity

Answer 38

a) 4% cap rule– income until 4% of plan’s or IRA’s value at beginning of accounting period (usually Jan. 1), excess to principal.
b) 10% income, 90% principal
c) all income, unless capital gain under FIT
d) principal

Question 39

How are these expenses allocated between income and capital?
Trustee’s commissions
ordinary/annual expenses (property tax, casualty insurance premiums, ordinary repairs, mortgage interest payments)
capital expenditures (cap improvements, expenses relating to environmental matters, estate taxes, mortgage principal payments)

Answer 39

trustee’s commissions- 1/2 and 1/2, but trustee can make different allocation if deemed appropriate
ordinary expenses- income
capital expenditures- capital

Question 40

can trustee refuse to diversify?

Answer 40

No

Question 41

What can settlor not waive in trust?

Answer 41

1) crime/public policy
2) exculpate for bad faith, intentional or reckless breach
3) statute of limitations
4) duty to respond to accounting demand
5) court’s power for jrd, removal, bond, or to deny compensation

Question 42

Is trustee personally liable on contracts? How is that different than PR?

Answer 42

Not personally liable on K unless she fails to disclose her representative capacity (that she’s a trustee).
PR is personally liable on K (but entitled to compensation from estate) unless K says otherwise. Signing “executor” not enough.

Question 43

Is trustee entitled to reimbursement from the trust estate for tort?

Answer 43

Yes, if tort was common incident of the business activity in which the trustee was properly engaged when the tort was committed.

Question 44

Can beneficiary sue third party for injury to trust property?

Answer 44

Trustee should sue unless:

1) trustee unable or unwilling to bring the action;
2) third party participated with trustee in committing breach of trust

Question 45

When can trust be modified/terminated?

Answer 45

Upon petition of trustee/beneficiary (not settlor), court can if:
1) purpose fulfilled, or impossible/illegal
2) changed circumstances, so modification/termination will further the purposes of the trust
3) tax purpose
Without court approval:
-If value under 50k, trustee may terminate after notifying beneficiaries.
-Division/merger

Question 46

How long can the trustee continue to exercise trust powers after termination of the trust, and for what purpose?

Answer 46

For reasonable time needed to wind up trust affairs and make distribution to the beneficiaries.

Question 47

Federal gift tax exclusion

Answer 47

14k per year. If more, report taxable gift. But doesn’t come into estate tax unless gross estate plus adjusted taxable gifts are 5.43M. Only works for gifts of present interests.

Question 48

life insurance

Answer 48

count as insured’s gross estate. Beneficiary: life insurance proceeds excluded from gross income.

Question 49

exclusion for tuition and medical payments

Answer 49

Unlimited exclusion for tuition and medical payments if the payment is made directly to the service provider.

Question 50

is a revocable trust subject to gift tax?

Answer 50

Not when made, because it’s an “incomplete” gift. But when it’s complete (i.e., settlor dies and money distributed), money in settlor’s gross estate for federal estate tax purposes.